Question

1. What is meant by the price elasticity of demand? How is it calculated? What does this particular calculation tell us?

2. Explain the difference between elastic and inelastic. Provide a real-life example of a good or service and describe whether or not demand for this particular good is elastic or inelastic.

3. When is demand perfectly inelastic? When is demand perfectly elastic? Explain the difference between these two terms. Provide examples.

4. Describe the difference between a price effect and a quantity effect. Again, provide real-life examples in your discussion.

Answer 1

1)

Answer: Price elasticity of demand measures the degree of responsiveness of demand to change in the price level. it quantifies the relationship between demand and price.

Price elasticity of demand = % change in quantity demanded / % Change in Price.

such calculation shows how much demand would change to change in the price level. We can judge if a particular good is a necessity or not.

2)

Answer: Elastic demand means elasticity of demand is greater than unity. or the Percentage change in demand is larger than the percentage change in the price level.

Inelastic demand: elasticity of demand is less than unity. or the Percentage change in demand is less than percentage change in the price level.

Examples:

• The demand for movie tickets is elastic. it is more sensitive to change in the price level.
• Demand for food inelastic. it is less sensitive to change in the price level.